Milestone in Transmission Regulation: U.S. Court of Appeals Upholds Order No. 1000

On Friday, the U.S. Court of Appeals for the District of Columbia Circuit rejected a host of challenges to the Federal Energy Regulatory Commission’s (“FERC”) Order No. 1000, upholding the order in its entirety. As we’ve previously discussed, Order No. 1000 aims to create a level regulatory playing field for independent transmission developers, thus encouraging new sources of badly-needed investment in the nation’s transmission infrastructure. The D.C. Circuit’s 97-page opinion upholding the order represents an important milestone in the evolution of regulation in the electric industry.

Order No. 1000 changed the planning and cost allocation regime for interstate transmission projects in three major requirements:

1. Each FERC-jurisdictional transmission provider must participate in a regional transmission planning process that identifies the most cost-effective regional and inter-regional transmission projects, and provides for a method of cost-allocation for the selected projects meeting six specific principles. Independent transmission developers and other non-incumbents need not participate in this process, but it must be open to their participation.
2. The planning process must provide for transmission expansion driven by public policy requirements, along with economic and reliability needs. State renewable portfolio standards and other public policies favoring the development of renewable energy are the largest public policy factor driving the need for new transmission.
3. The federal “right of first refusal” (“ROFR”) must be removed from FERC-approved transmission tariffs. The ROFR allows incumbent utilities to construct transmission projects proposed by other entities within the incumbents’ service territories. FERC views this as a major barrier to entry for independent transmission developers, whose investment in planning and permitting is essentially wiped out if the incumbent exercises its ROFR. Although not common in the Northwest, the ROFR requirement proved extremely controversial in other parts of the country.

A variety of interests, including state utility commissioners, trade organizations, publicly-owned and investor-owned utilities, and independent transmission developers, petitioned the D.C. Circuit to overturn Order No. 1000. The petitioners mounted a number of different statutory challenges and also challenged the adequacy of the factual findings supporting many of FERC’s actions. All challenges were rejected by the Court.

Of particular interest for the Pacific Northwest, where Order No. 1000’s mandatory cost allocation requirement has provoked considerable controversy, the D.C. Circuit rejected a number of statutory and factual challenges to that requirement. While the Court’s findings are unlikely to resolve the controversy in our region, a different outcome may have blunted the force of FERC’s requirement.

The D.C. Circuit’s decision upholding FERC’s application of Order No. 1000 to non-jurisdictional utilities is also important in the Northwest. In our region, FERC has since the mid-1990s encouraged non-jurisdictional utilities like the Bonneville Power Administration to participate in transmission-related reforms through the “reciprocity” principle. That is, non-jurisdictional utilities are encouraged to provide access to their facilities on terms equivalent to the terms FERC imposes on jurisdictional utilities. If such reciprocal access is provided, the non-jurisdictional utilities are guaranteed access to FERC-jurisdictional facilities, but if they do not provide reciprocal access, they can be denied access to FERC-jurisdictional facilities.

FERC applied Order No. 1000 to non-jurisidictional utilities using the reciprocity principle. FERC’s conclusion in this regard was attacked in the Appeals Court from two directions. A coalition of publicly-owned utilities argued that Order No. 1000 extends the reciprocity principle beyond its previous limits without adequate justification, while the investor-owned utilities’ national trade group argued that FERC should have made Order No. 1000 mandatory for non-jurisdictional utilities. The Court rejected both claims. Accordingly, as applied in the Northwest, Bonneville and other publicly-owned transmission providers will have to comply with Order No. 1000 if they wish to maintain their reciprocity status, but compliance will not be a matter of legal mandate.